Page 168 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

If any person declared that so and so is a partner in a firm, that concerned person Notes
immediately after coming to know of that should deny it. If he fails to deny, he will be
liable to those persons who extend credit to the firm on the basis of his being a partner.
Such a partner is known as a partner by holding out. Section 28 thus contemplates the
following two situations: (i) A person who by words spoken or written or by conduct
represents himself to be a partner in a firm. (ii) A person who knowingly permits himself
to be represented to a partner in a firm. Such a person is liable as a partner in that firm to
anyone who has, on the faith of any such representation, given credit to the firm. However,
such a partner does not acquire any claim thereby on the firm.

Example: Partner retires from a firm but does not give notice of his retirement. He is a
partner by holding out.

Example: Kulkarni induces Sarabhai to believe that he (Kulkarni) is a partner of a firm
known as K & Co. Sarabhai believing that Kulkarni is a partner, gives credit to K & Co. Kulkarni
will be responsible for compensating Sarabhai. Kulkarni will not be heard to say that he is not
a partner of K & Co.

The doctrine of holding out, however, is not applicable in the following cases: (i) The
liability of a partner by holding out does not extend to torts (i.e., civil wrongs) committed
by other partners of the firm. (ii) The liability does not extend to bind the estate of a
decreased partner, where after a partner’s death the business of the firm is continued in the
old firm’s name [s.2 (28)]. (iii) There is no liability of the partner by holding out where he
has been adjudicated insolvent (s.45).
7. Working partner: A partner, because of his special qualifications, may be assigned the
management and control of business. Such a partner is known as ‘working partner’. A
working partner normally receives a fixed amount of salary, besides his share in the
profits of the firm. Other partners, however, remain liable to the third parties for all his
acts.

8. Incoming partner: Section 31 provides that subject to the contract between the partners
and to the provisions of s.30 (which deals with the position of a minor partner) a person
can be introduced as a partner into a firm with the consent of all the existing partners.
Thus, a person who is admitted as a partner into an already existing firm with the consent
of all the existing partners is called an ‘incoming partner’. An incoming partner does not
become liable for any acts of the firm done before his admission as a partner. However,
where he specifically agrees to bear the past liabilities, he will be liable to the other
partners for the same. Third parties, however, cannot hold him liable since there is no
privity of contract between the new partner and the creditors.
9. Outgoing partner: A partner who leaves a firm in which the rest of the partners continue
to carry on business is called an ‘outgoing’ or retiring partner. A partner may retire:
(i) with the consent of all the other partners; (ii) in accordance with an express agreement
by the partners; or (iii) where the partnership is at will, by giving notice in writing to all
the other partners of his intention to retire [s.32 (1)].
A retiring partner continues to remain liable to third parties for all the acts of the firm until
public notice is given of his retirement. Such a notice may be given either by the retiring partner
or by any member of the reconstituted firm. A partner who retires from a firm does not cease to
be liable for the debts or obligations of the firm incurred before his retirement. A retiring
partner will also be liable to third parties for the transactions of the firm begun but unfinished
at the time of his retirement. A retiring partner may, however, be discharged from any liability
to any third party for the acts of the firm done before his retirement if it is so agreed with the

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